Vodafone to return GBP1.5B to holders despite loss

LONDON--Vodafone Group PLC (VOD.LN) plunged into the red Tuesday as it took a new 5.9 billion pounds ($9.37 billion) write-down on its hamstrung Spanish and Italian operations.

The world's second-biggest operator after China Mobile swung to a GBP1.98 billion net loss in the six months ended Sept. 30 from a net profit of GBP6.68 billion a year earlier. Revenue from voice calls, messaging and data downloads sagged 1.4% in the second quarter, battered by a steep 11% drop in Southern Europe where the company was forced to discount heavily. It was the first fall in mobile service revenues--its main income stream--in 10 straight quarters.

The huge GBP5.9 billion charge is the latest in a string of write-downs that have tracked the deteriorating economic backdrop across Europe's southern rim over the past 4[1/2] years.

Vodafone generates around three-quarters of its revenue from Europe, with the Spain, Italy, U.K. and Germany contributing the lion's share. It has other operations straddling the globe including the U.S., Africa, India, the Middle East and Australia.

Vodafone took a GBP4 billion write-down at the end of its fiscal year six months ago to reflect the battered state of its businesses in Spain, Italy, Portugal and Greece. This followed a GBP6.1 billion hit on the same businesses plus Ireland the previous year. In all, the company has written down GBP24.2 billion over the past 4[1/2] years.

"Europe continues to be challenging," Chief Executive Vittorio Colao said Tuesday. "We saw a broad divide between the more stable markets of Northern Europe and the weaker markets of Southern Europe," he said, adding that the outlook remains tough in the short term.

The heavy losses in Europe overshadowed a large windfall from the U.S., where Verizon Wireless, Vodafone's mobile joint venture with Verizon Communications Inc.
VZ, -1.96%
is benefiting from its rollout of LTE superfast mobile network to deliver double-digit growth. Vodafone owns 45% of the mobile operator, the biggest in the U.S.

Vodafone said it would receive a GBP2.4 billion dividend from Verizon Wireless and plans to return GBP1.5 billion of that to its shareholders. The remainder will be used to pay down its GBP26 billion net debt.

The dividend boost mostly fell flat on the market where telecommunications analysts expressed concern over the write-down and complained that the size of the dividend was below expectations.

"The miss across the board is worrisome," said Saeed Baradar at Societe Generale. "Organic growth in service revenues fell 1.4% year on year which is the first negative growth in 10 quarters and compares with the previous guidance of 1-4% growth," he said. The previous guidance was made less than six months ago which shows how badly the situation has deteriorated, he said.

Vodafone's share price was down 4% just after lunch, making it one of the biggest fallers on the London Stock Exchange. The shares have fallen 9.7% since January as investors fret over its exposure to debt-stricken Southern Europe.

The company said its free cash flow this year will come in at the lower half of the GBP5.3 billion to GBP5.8 billion range it outlined in May. But it upgraded its guidance for annual adjusted operating profit, saying it should now reach "the upper half" of the GBP11.1 billion to GBP11.9 billion" range forecast in May, thanks to the strong performance by Verizon Wireless.

Vodafone declared an interim dividend of 3.27 pence, up 7.2% from a year earlier, contrasting with several rival European operators including France Telecom and Dutch operator KPN who have cut back their shareholder returns. Chief Financial Officer Andy Halford was tight-lipped on dividend plans beyond the current financial year.

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